March 27, 2025

The VIX May Be Telling Us Something About the Market

The last two months have felt historically volatile.

Since Donald Trump took office for a second time and immediately started handing out tariffs like they were surprise take-home prizes at an Oprah taping (“YOU get a tariff, and YOU get a tariff!”), the market has been unsettled. And indeed, from mid-February through mid-March, things weren’t simply unsettled – they were bad. Both the S&P 500 and the Nasdaq entered correction territory – the fifth-fastest correction in the last 75 years, in the case of the S&P. Fears of higher inflation and possibly recession have come rushing back to the surface, consumer confidence is at a 12-year low, and interest rate angst is back in full force.

And yet, actual volatility – as measured by the VIX, a.k.a. the “investor fear gauge” – has been … fairly muted? That’s not entirely true. When stocks bottomed a couple weeks ago, the VIX spiked as high as 28, its highest reading since last August. But outside the first three weeks of March, the VIX has been below 20 and is now (as of this writing) at 17. That’s not “low,” mind you. But it’s also not panic-level. For comparison, the VIX was above 20, and often above 30, for virtually all of 2022, when stocks entered a full-fledged bear market. For the year, the VIX is actually down slightly.

So while markets feel perhaps as volatile as they’ve been in years outside of the Covid crash in 2020, they’re not actually that volatile. The average retail investor may be fearful of what could happen to stocks, but Wall Street isn’t. The VIX is barely higher than it was this time a year ago, six months ago, and three months ago. Often, a plummeting VIX precedes a big market run-up.

Since March 10, the VIX has fallen 38%. The last time it fell that much on a percentage basis was the week before Christmas – a month before stocks ascended to new all-time highs. Prior to that, there was a similar drop-off in volatility the week before the election, followed by a 5% spike in the S&P the week after the election; a 31% decline in the VIX from Labor Day to the third week of September, a harbinger of an 8% climb in the S&P in six weeks; and the post-Japanese carry trade comedown in volatility last August, which rang in an 8.5% surge in stock prices the last three weeks of the month.

The inverse relationship between volatility and stock prices rarely fails. And the VIX usually starts to fall before the market begins to surge. And that appears to be what’s happening now. The VIX topped out on March 10; the S&P didn’t bottom until March 13. While the VIX has fallen 38% in the last 16 days, the S&P is only up 4.6% in the last 13 days. If very recent history holds, stocks should continue to get a boost in the coming weeks. Beyond that? Who knows. But as long as the VIX remains in check – below 20 typically means investor “fear” is under control – stocks should be OK, regardless of what’s happening with tariffs, interest rates or inflation.

With the market’s health improving, I’ll have a new addition to our Cabot Value Investor portfolio in next week’s issue. In the meantime, our existing holdings continue to recover from the late-February/early-March selloff. Details below.

Note to new subscribers: You can find additional commentary on past earnings reports and other news on recommended companies in prior editions and weekly updates of the Cabot Value Investor on the Cabot website.

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This Week’s Portfolio Changes

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Last Week’s Portfolio Changes

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Upcoming Earnings Reports

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Growth & Income Portfolio

Growth & Income Portfolio stocks are generally higher-quality, larger-cap companies that have fallen out of favor. They usually have some combination of attractive earnings growth and an above-average dividend yield. Risk levels tend to be relatively moderate, with reasonable debt levels and modest share valuations.

Aegon Ltd. (AEG) is a mid-cap ($11 billion) Dutch life insurance and financial services company that’s nearly 180 years old. Its largest and perhaps most recognizable business is Transamerica, a leading provider of life insurance, retirement and investment solutions in the U.S. With more than 10 million customers, Transamerica targets America’s “middle market,” and its wholly owned insurance agency World Financial Group – which boasts 86,000 independent insurance agents – helps facilitate the insurance part of Transamerica’s business plan.

Aegon also does business in the United Kingdom, as Aegon U.K. is a leading investment platform with 3.7 million customers and is trying to become the U.K.’s leading digital savings and retirement platform. Aegon Asset Management is the company’s global asset management wing. And Transamerica Life Bermuda is the name for Aegon’s life insurance business in Asia. The company has customers all over the globe, with major hubs in Spain, Portugal, France, Brazil and China.

Aegon’s sales peaked in 2019, when the company raked in a record $68.7 billion as the pre-Covid market hit a crescendo. Covid hurt ($42 billion in 2020), and the 2022 bear market hurt even worse (Aegon actually lost $4 billion that year), but the company has since rebounded, with 2023 revenues coming in at $32 billion. While revenues mostly held steady in 2024, the company became profitable again, reporting $797 million in net profits in the second half of 2024 alone, with free cash flow of $414 million. This year, the company expects its operating capital generation (the amount of capital a company generates from its ongoing business operations, excluding one-time events) to improve 46% and its cost of equity to shrink. Meanwhile, Aegon is returning its extra cash to shareholders in droves, announcing a $1.25 billion share repurchase program over the next three years, and upping its dividend payout by 19% last year, resulting in a very generous current dividend yield of 5.2%.

AEG shares trade at 8.4x forward earnings estimates, 0.44x sales and have an enterprise value/revenue ratio of just 0.36 – cheap on all fronts, and with the growth picture improving. AEG is far from sexy, but it has a history of churning out steady returns.

AEG shares were up another 1.5% this week on no news. The stock is now up nearly 16% year to date. European stocks remain in favor, up 7.5% year to date, as money flows into European markets as a hedge against U.S. uncertainty. Trading at just 8x earnings estimates, however, the stock still has 18% upside to our 8.00 price target. BUY

Bank of America (BAC) is perhaps the most resilient large U.S. bank. It bounced back from the Great Recession of 2007-08, when BAC shares lost 93% of their value. The stock has rebounded after losing half its value from the 2022 bear market and subsequent implosion of Silicon Valley and Signature banks in March 2023. Now, the bank has never been more profitable or generated more revenue. And at 11.7x forward earnings estimates, it’s cheap, even after doubling the market in the last year.

Warren Buffett has long seen value in BofA; it’s still the third-largest position in the Berkshire Hathaway portfolio, despite some recent trimming. So, we’re not breaking any new ground here. But sometimes the obvious choice is the right one. The combination of growth, value (BAC also trades at just 1.2x book, cheaper than all but Citigroup among the big banks), and share price momentum makes for an enticing formula.

BAC shares were up 4% this week as the bank stock continues to recover from a rough first half of March. There was no major company-specific news. This month’s cooler-than-expected inflation report and no signs (yet) of a significant economic downturn are helping the bull case for banks. And trading at less than 12x forward earnings estimates, BAC remains a bargain. As long as the U.S. economy doesn’t collapse, the stock should be much higher in the months to come. It has 30% upside to our 57 price target. BUY

BYD Company Limited (BYDDY) has long been one of China’s top automakers. What really sent its sales into hyperdrive, however, was when it made the switch to all battery electric and hybrid plug-in vehicles in 2022. Revenues instantly tripled, going from $22.7 billion in 2020 (a record, despite the pandemic) to $63 billion in 2022. In 2023, sales improved another 35%, to $85 billion. In 2024, revenues ballooned to $107 billion, or 25% growth, with another 24% growth expected in 2025. The EV maker has emerged as a legitimate rival to Tesla.

But there’s even greater upside. Right now, BYD does roughly 90% of its business in China, accounting for one-third of the country’s total sales of EVs and hybrids this year. The company is trying to change that, recently opening its full-assembly plant outside of China, with a new plant in Thailand starting deliveries. A plant in Uzbekistan puts together partially assembled vehicles. A plant in Brazil is expected to open early next year. And BYD has plans to open more new plants in Cambodia, Hungary, Indonesia, Pakistan and Turkey. Mexico and Vietnam are possible targets as well. Despite no plans to do business in America just yet, BYD is on the verge of becoming a global brand.

And while BYDDY stock has fared well, it hasn’t grown as fast as the company. At 23x earnings estimates, BYDDY currently trades at roughly a quarter of its five-year average forward P/E ratio (89.6). And its price-to-sales (1.37) ratio is about half the normal five-year ratio. As BYD continues to expand globally, look for its valuation to catch up with its industry-leading performance.

BYD shares finally cooled off, pulling back 5%, but are still up 50% year to date. News for the surging Chinese EV giant continues to be impressive. Monday’s earnings report was the latest reason for the company to puff out its chest: In the fourth quarter, net profits improved 73% while sales expanded 52.7%. For full-year 2024, profit growth was 34% on 29% sales growth (to $107 billion, more than Tesla’s $97 billion last year), and BYD overtook Volkswagen as China’s top automobile seller at 4.25 million vehicles sold. That news comes on the heels of last week’s announcement that the company is launching the fastest EV battery charger ever, capable of charging to 400 kilometers in five minutes – the equivalent of filling a gas-powered vehicle at a fuel pump. Prior to that, BYD had unveiled its new God’s Eye self-driving technology and signed an AI deal with up-and-comer DeepSeek. BYD is red-hot and making all kinds of eye-popping news, and as a result, it’s one of the most sought-after stocks on the market, despite its status as a Chinese stock in a Trump administration.

BYDDY shares have 12% upside to our 115 price target, having already blown past our original target of 90. That 115 target may still be conservative. BUY

The Cheesecake Factory Inc. (CAKE) is ubiquitous. With 345 North American locations, chances are you’ve eaten at one, indulged in their specialty high-calorie but oh-so-tasty cheesecakes and browsed through menus long enough to be a James Joyce novel. But despite being seemingly everywhere already and nearly a half-century old, the company is still growing.

Sales have improved every year since Covid (2020), reaching a record $3.44 billion in 2023. In 2024, revenues expanded to $3.58 billion. But the earnings growth is the real selling point. EPS more than doubled in 2023 (to $2.10 from 87 cents in 2022) and swelled to $3.28 in 2024, a 56% improvement.

It’s still expanding too, opening 26 new restaurants in 2024, with plans to open another 25 this year. Those aren’t just Cheesecake Factories – the company also owns North Italia, a handmade pizza and pasta chain; Flower Child, a health food chain that caters to those with special diets (vegetarians, vegans, gluten-free, etc.); and Blanco, a Mexican chain owned by Fox Restaurant Concepts, which The Cheesecake Factory Corp. acquired in 2019.

CAKE shares trade at 13.7x 2025 EPS estimates and at 0.69x sales. The bottom-line valuation is well below the five-year average forward P/E ratio of 15.6; the price-to-sales ratio is in line with the five-year average.

With shares trading at 15% below their 2017 and 2021 highs, there’s plenty of room to run.

CAKE shares were up 4% this week as the restaurant chain announced 22 additions to (and 13 subtractions from) its extensive menu. Among the additions, there’s a new smashburger, some vegetarian options like Asian cucumbers and baby carrots, and new alcoholic beverages including a Japanese Whisky Sour and a Margarita Verde. It’s all part of the restaurant’s ongoing effort to have “something for everyone,” which is why it does such good business.

Of course, The Cheesecake Factory, like all U.S.-based restaurants, is fighting an uphill battle at the moment against consumer confidence dipping to a 12-year low. But as Jerome Powell noted in last week’s Fed press conference, low consumer confidence doesn’t always translate to low consumer spending. So far, the U.S. economy is holding up well. Thus, our 65 price target – 29% higher than CAKE’s current price – seems quite reachable. BUY

Dick’s Sporting Goods (DKS) has been growing steadily for years.

From 2016 to 2023, the sporting goods chain’s revenues have improved 64%, from just under $8 billion to just under $13 billion. In 2024, topped $13 billion for the first time. It should top $14 billion this year.

Dick’s, in fact, has grown sales in each of the last seven years – including in 2020 and 2021, when most other retailers saw sales nosedive due to Covid restrictions. But Dick’s all-weather ability to keep growing no matter what’s happening in the world or the economy speaks to its versatility. Since Covid ended, however, Dick’s sales have entered another stratosphere. As youth sports returned in 2021, Dick’s revenues jumped from $9.58 billion to $12.29 billion. They’ve been rising steadily each year since and are expected to do so again this year.

But Dick’s isn’t purely a growth stock—it’s also undervalued. DKS shares currently trade at just under 14x forward earnings estimates and at 1.28x sales. To be sure, it’s not the cheapest stock in our portfolio. But it is one of the fastest growing – and pays a solid dividend to boot.

DKS shares finally bounced back, rising more than 6.5% on no news. Perhaps all those Dick’s commercials featuring Tom Brady that seem to run on a loop during March Madness have helped. Or maybe the stock simply benefited from the market’s bounce-back. Or perhaps investors took notice of another strong quarter for the sporting goods giant and rewarded shares a couple weeks after the fact.

In the fourth quarter, Dick’s beat estimates on both the top and bottom line, with EPS of $3.62 topping the $3.48 estimate and $3.89 billion in sales ahead of the $3.76 billion expected. Also, same-store sales improved 6.4% in the fourth quarter (its best performance in two and a half years), 5.2% for full-year 2024, and earnings were up 15% last year. Guidance came in a bit cautious, which may partly explain the initial selling that occurred following the report. But this week’s bounce-back in a healthier market seems to be a tacit admission that the selling was overdone.

DKS shares have 20% upside to our 250 price target. The 2.3% dividend yield adds to the appeal. BUY

Buy Low Opportunities Portfolio

Buy Low Opportunities Portfolio stocks include a wide range of value opportunities. These stocks carry higher risk than our Growth & Income stocks yet also offer more potential upside. This group may include stocks across the quality and market cap spectrum, including those with relatively high levels of debt and a less clear earnings outlook. The stocks may not pay a dividend. In all cases, the shares will trade at meaningful discounts to our estimate of fair value.

ADT Inc. (ADT) is literally a household name.

It’s a 150-year-old home security company whose octagon-shaped blue signs with white lettering that say “Secured by ADT” are ever-present in neighborhoods across the country. ADT provides security to millions of American homes and businesses, with products ranging from security cameras, alarms and smoke & CO detectors, to door/window/glass break sensors and more, all of which can alert one of ADT’s industry-best six 24/7 monitoring centers if any one of those security systems is breached.

Business has been fairly stable, with annual revenues hovering in the $5 billion range for four of the last five years (2021 was an exception, with a dip down to $4.2 billion during Covid) and is on track to do it again both this year and next. But where the century-and-a-half-old company has really improved of late is profitability. The last three years marked the first time the company has been in the black in consecutive years, with earnings per share going from 15 cents in 2022 to 51 cents in 2023 to 69 cents a share in 2024. EPS is expected to improve to 81 cents in 2025.

All of that EPS growth makes the share price look quite cheap. ADT shares currently trade at just 10x earnings estimates and at just 1.61x sales. A solid dividend (2.7%) adds to the appeal of this mid-cap stock.

ADT shares were up another 5% this week to reach new 52-week highs above 8.2! The only news was that the company made a couple changes to its executive team, which I doubt moved the needle much. Instead, the stock is still likely drawing strength from its Q4 earnings report from late February. Fourth-quarter revenue improved 8% year over year, while adjusted EPS for full-year 2024 improved 25%. The company also reported record monthly revenue and customer retention. With improved cash flow (profit margin was up to 13% from a net loss in FY ’23), the company also announced a $500 million share repurchase plan this year.

There were some weak spots, however. Full-year 2024 revenue was down 1.7% year over year, and full-year EPS (69 cents) fell short of analyst estimates by 7%. So the pullback along with the market after some initial fervor seemed reasonable. But in the past couple weeks, investors have been buying back in, and ADT shares are now up 19% year to date. The stock still has 21% upside to our 10 price target. BUY

The Cigna Group (CI) is the fifth-largest healthcare company in the U.S., with $247 billion in revenue over the last 12 months. It’s a health benefits and medical care provider with a market cap of $80 billion, 170 million customers in over 30 countries, that pays a dividend (1.9% yield) and grew sales by 27% and adjusted earnings by 9% in 2024 and is expecting another 10% growth this year. And yet, the stock hasn’t budged much in two years and trades at a mere 10.7x earnings estimates and 0.37x sales. It’s the cheapest CI shares have been in more than a year.

Why the underperformance? Earnings have been inconsistent, with EPS declining 18.8% in 2023 and by 31.4% in 2021. But that appears to be changing, with double-digit growth last year and expected again in 2025, led by its Evernorth Health Services branch, which reported 33% revenue growth in the latest quarter. And healthcare stocks as a group were the second-worst performer of the 11 major S&P 500 sectors in 2024, up a mere 0.87%. As Baby Boomers reach their golden years, healthcare is more in demand than ever, so the sector won’t stay down long. And CI has a habit of outperforming when times are good.

CI shares finally paused after weeks of steady recovery. But the stock is still up more than 15% year to date. The only news was that Cigna sold its Medicare business to Health Care Service Corp. for $3.7 billion, which isn’t nothing. By selling its Medicare business, Cigna frees itself from rising Medicare costs and can focus more on its employer-sponsored healthcare coverage operations. The company plans to use the money raised from the sale for share repurchases and investing in its health services and health benefits businesses.

With plenty of momentum, the stock still has 32% upside to our 420 price target. BUY

Peloton (PTON) was all the rage during Covid, as people stuck at home snatched up the stationary bike with a built-in, interactive touch screen like hotcakes, and revenues quadrupled in two years. Then, Covid ended, people stopped buying Pelotons, and PTON shares – up 700% in the last nine months of 2020 – fell to nearly zero, at a scant $3 per share. The selling was overdone, considering Pelton’s sales only fell off by about a third. Now, the bleeding has just about stopped, and the company is expecting to grow again in the coming year. Aggressive cost-cutting – the company is lowering costs by $200 million this (2025) fiscal year alone – has narrowed profit losses and allowed Peloton to generate free cash flow again. It’s using that cash to attract and retain customers, investing in software updates such as personalized workout plans and private “teams” for every subscriber. It’s offering new apps such as Strength+ and fitness “games.” And it is exploring new strategic partnerships to broaden its reach and perhaps start attracting new customers again.

After a painful stretch from mid-February through mid-March, PTON shares are back with a vengeance, advancing 7.5% this week after bouncing 11% last week. That’s only good enough to recover a quarter of its late-winter losses. But it’s a start.

Is it enough to restore a Buy rating on the stock? Not yet. Once PTON shares can get back above their 50-day moving average (7.8), I’ll consider it. With no obvious catalyst on the horizon (earnings aren’t out for more than a month), I’ll keep our rating at Hold, for now. HOLD

Note for stock table: For stocks rated Sell, the current price is the sell date price.

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